What we liked

  • The ASX All Ordinaries has staged one of the best months in several years, adding 5.31% moving to 6,252 in February. In a positive sign for patient investors, it was the boring, profitable and non-discretionary spending businesses that outperformed during reporting season, as signs of an economic slowdown hit the more popular, higher multiple growth names.
  • On first blush, reporting season could be viewed as disappointing, with statutory profits excluding Wesfarmers and BHP Billiton (which tilted the figures) actually falling 5.5%. For those investing into mature, less discretionary businesses, however, the performance was substantially better than the growth companies that drove returns in 2018. It appears the deleveraging process in Australia has begun, with businesses across all sectors offering less than rosy outlook statements.
  • US GDP beat expectations adding +2.6% on the previous quarter even with the longest US Government shutdown in history dragging the figures down.
  • The Protecting your Super Legislation, which increases the ATO’s power to consolidate smaller superannuation accounts, bans exit fees and places a 3% fee cap on accounts under $6,000 was passed during the month. In addition, the proposal to expand the minimum number of SMSF trustees was also brought to the house for consideration. Unfortunately, the requirement for super funds to require members to opt into insurance is in limbo.
  • Glencore announced it would be cutting further expansion into coal mining, after ramping up its investments significantly in 2018. The timing comes as coal prices continued their extended recovery with management pointed towards increasing political pressure for the change. The reduction in investment is likely to lead less supply in the future and potentially higher prices, as the demand for coal remains strong from emerging economies.
  • As the war of words between industry funds and every other participant in the superannuation industry, the Future Fund delivered a thumping return of 5.8% for 2018. In comparison, the best performing balanced fund were lucky to deliver a positive, with most negative, and the average just 0.6%. The Future Fund was rewarded for its lower volatility, lower risk approach as the increasingly aggressive industry funds were burned by their large sharemarket and interest rate sensitive allocations.
  • Auction clearance rates showed signs of recovering, with Sydney hitting a 7-month high of 61% and Melbourne around 54% as buyers returned to the market and owners seemed to begin accepting that price rises are now longer on the horizon.
  • Whilst the majority of the economic news in Australia is pointing to a property and construction led slowdown, the employment market remains a highlight as wage growth reported at 2.3% year on year, and the participation rate once again increase to 65.7% suggesting more people are continuing to enter the workforce.

What we disliked

  • Of major concern was the unexpected revelation that several Chinese ports had banned imports of Australian coal unexpectedly and indefinitely. Whether this is a result of a weakening political relationship, due to quality purposes or the Chinese sending a message, it reiterates the cyclical and fraught nature of investing into commodity companies. Coal recently overtook iron ore as the largest contributor to our exports and a key driver of GDP.
  • The protracted 5+ year negotiations and strike action occurring at the Port Kembla coal terminal in NSW. Many readers will remember the dark days of the 1980’s when Chris Corrigan made his name standing up to the unions and required the input of the Minister for Workplace Relations. As outlined in our recent UWJ Quarterly Journal, the unions are garnering more power and wealth every year, even as membership numbers stagnate.
  • The disappointing earnings downgrade from garbage collector Bingo Industries just a few months removed from their AGM in 2018. Management indicated growth would be 0% after previously guiding towards a 15-20% increase in profit. More concerning has been the ability of analysts to see through the forecasts and identify the garbage collection is not a high growth sector. This has been reflected in various other businesses, like Costa Group, where despite hard evidence (like the price of blueberries and avocados halving) analysts were still willing to forecast double digit profit growth. An economic slowdown like that occurring today, requires investors to once again think about the companies they are investing in, rather than just the share price; which unfortunately has been far too uncommon in recent years.
  • Talk of the six LNG export terminals on the east coast being mothballed, as they struggle to find enough coal seam gas to process, export markets slow and they are forced to direct more product to the domestic market. This is a bad sign for those businesses, including Santos and AGL that spent billions setting up terminals to export into Asia, but have struggled to deliver the volumes.
  • Unfortunately, the US and China aren’t the only ones using tariffs to protect their businesses and economies, it appears members of the UK Parliament are seeking tariffs on Australian farm importsn, including sheep meat, beef, poultry, milk and cheese in an effort to protect their industries following a Brexit vote.
  • We aren’t sure who is advising Australian Super at the moment, but to announce a partnership with Qantas offering Frequent Flyer points to those who open new accounts with the group is a little out of touch in our eyes. At a time when the hawking of superannuation products is being banned this only attracts further questions about the kick backs being paid to Australian Super or the sharing of member data that will result.
  • Permabear Gerard Minack is once again predicting a recession will befall our wonderful economy. Whilst we acknowledge the Gerard has been calling a recession for every year of the last 10, it seems he may be onto something this time around. The poor economic results continued to roll in during February including the following: 1)Building permits fell -8.4% in December, with experts expecting an increase of 1.8%. This took the year on year fall to 22.5%; 2) Exports from Australia dropped -2% in December, with imports falling by a further 6% as it appears the consumer sector is beginning a deleveraging phase. 3) Home loans fell -6.1% in December, much more than the 2.8% expected, as banks and recent APRA measures make it increasingly difficult to borrow. 4) Construction work also fell -3.1%, compared to expectations of +0.4%; and finally 5) Retail sales disappointed more than expected falling 0.4% in December and growing just 2.75% over the year.